The Digital Age: Can Your Core Keep Up?

It’s coming, and it’s in the cloud. But is it right for my financial institution?

This is a very astute question, according to Mike Neale, PRI Director of System Evaluation. Financial institution leaders are currently hearing a great deal of hype about Cloud-Native Core Solutions, but it’s wise to slow down and evaluate these solutions in terms of whether and where they bring value to the FI. There are several considerations every FI should take into account when deciding whether to implement a core solution designed for cloud deployment.

Cloud native solutions designed on modern micro-services architecture with open and extensible data structures and business logic along with robust API capabilities including event management is logical and important for the future, Neale said. However, generally cloud native core solutions in the market today aren’t truly ready for prime time as full community banking core replacements.

“Each of the ‘Big Three,’ as well as other legacy providers have addressed the open API issue at some level and each have significant capabilities in data access,” Neale said. “Legacy core solutions shouldn’t be put out to pasture just yet.”

While many FIs say they need to evolve to a cloud native core, few can articulate a set of clear business objectives that they are going to accomplish with cloud core transformation. Some will say they need to be able to “do fintech” but do not have a sense of what the term means or how they can utilize fintech without taking their entire core solution to the cloud.

Neale believes fundamentally that FIs must have a vision and plan for execution before jumping into new technology that may not meet their current needs. He advises to pinpoint the FI’s “why.” How will it benefit prospects, customers or business partners?

“Fintechs, a term with a wide range of definitions, at their most basic level can become shiny objects that can distract banks from their business objectives. While it doesn’t have to be overly elegant, a road map that looks to your future state is vital. Keep that road map updated as your strategy evolves and technology advances.” Demystifying Fintech: Playing in the Space as a Consumer of Services

As Jason Henrichs, CEO at Alloy Labs Alliance, points out in the article, A Strategy for Standing Out in the Crowded World of Fintech, “Technology is not a strategy. The “tech” part of fintech feels so innovative that it sometimes tricks people into believing that it must be inherently strategic. But technology itself is not a strategy. It’s just a tool, waiting for humans to develop a strategy to use it.”

In cases where an FI has established a well-defined business opportunity for implementation of a fintech solution to an isolated customer segment that requires a cloud native core solution, Neale said what he sees as being most successful is not a total replacement of the core solution but the isolated deployment of a cloud-native solution, frequently referred to as a “side-car” deployment.

“This approach is common for FIs in the Banking as a Service (BaaS) space and allows the legacy core to continue to support more complex business,” he said.  “We anticipate this approach will likely become less common over time as cloud native solutions mature into full core replacement solutions.”

Neale points out that another critical issue not being fully addressed with core transformation is changes to human resources. FIs that aim to be innovative with the core system must ensure they are staffing with a business and technical team who can truly leverage the core investment. Are you getting the most out of the current solution? 

“In many interactions, we find an FI that believes they need a cloud-native solution to support a new business opportunity, but after drilling down on the specific requirements, we identify that the FI’s current core solution can support the requirements,” he said.

There is no question that cloud-native solutions can provide a wide variety of benefits, and soon the industry will see more fully matured cloud-native core solutions with the capability to replace legacy applications in use today by most community FIs. Every FI leader responsible for technology planning should stay abreast of developments in this area as technology advancements continue to accelerate.

“Part of what we work to accomplish is making sure our clients have a well thought out business strategy,” Neale said. “Once that is in place, we can assist in making sure that they are investing in the right technology. Once the technology stack has been established, we focus on negotiating pricing.”

In the next blog, Sue Schmiedeler, project manager at Profit Resources Inc., will dive deeper into “Tips to Get the Most Out of Your Core System.”

Resources:

Demystifying Fintech: Playing in the Space as a Consumer of Services

Lending Fintech Can Help Banks Reclaim Consumer and Small Business Markets and Retain Customers

Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to propel growth and improve profitability.